Due process in assessment

The Bureau of Internal Revenue (BIR) is continuously intensifying its efforts in collecting taxes. As a result, more taxpayers are receiving Letters of Authority and being subjected to various forms of BIR examination. Therefore, it is recommended that taxpayers prepare for possible tax audits not just by reconciling their books but also of equipping themselves with knowledge on tax laws and regulations, particularly on the due process applicable to tax examinations.

In a recent Court of Tax Appeals (CTA) case, entitled Esper R. Vargas, JR. vs. Commissioner of Internal Revenue (CIR), CTA Case No. 8750 dated March 08, 2016, the court granted the taxpayer’s petition for review and canceled BIR’s assessment for deficiency income tax and value-added tax for the calendar year (CY) 2007. The CTA ruled that the BIR’s assessment was void on the basis that the BIR violated the taxpayer’s right to due process because no valid assessment was sent to the taxpayer.

As provided under Section 228 of the Tax Code, the Commissioner shall first notify in writing the taxpayer of his findings when he finds that proper taxes should be assessed against the taxpayer. Failure to comply with this requirement shall be considered a violation of the taxpayer’s right to due process.

The CTA’s decision was based on the fact that the assessment was not actually received by the taxpayer despite constructive service done by the BIR.

In this case, the BIR alleged that notices, letters, and other communications pertaining to the assessment were sent to the taxpayer’s address by registered mail or by constructive delivery. In its testimony, the BIR claimed that it went to the address specified in the letter notice for the purposes of serving the letter and that since no one was in the given address, the BIR left the other copy of the letter notice in the mail box and served the other copy through registered mail which was evidenced by a registry receipt. When asked whether the address was ascertained to be the correct address, the BIR asserted that the address used was the address used in the taxpayer’s tax declaration which the BIR procured from the Municipal Assessor’s Office. This was allegedly the same address given to the BIR of Marikina City. On the other hand, the taxpayer denied of having received the assessment and maintained that he had no knowledge of the assessment considering the fact that the taxpayer’s business located at the address used by the BIR had already been closed since 1999.

Section 3.1.7 of BIR Revenue Regulation No. 12-99 provides that “if the notice to the taxpayer herein required is served by registered mail, and no response is received from the taxpayer within the prescribed period from date of the posting thereof in the mail, the same shall be considered actually or constructively received by the taxpayer. If the same is personally served on the taxpayer or his duly authorized representative who, however, refused to acknowledge receipt thereof, the same shall be constructively served on the taxpayer. Constructive service thereof shall be considered effected by leaving the same in the premises of the taxpayer and this fact of constructive service is attested to, witnessed and signed by at least two (2) revenue officers other than the revenue officer who constructively served the same. The revenue officer who constructively served the same shall make a written report of this matter which shall form part of the docket of this case.”

Based on the provisions of RR No. 12-99, it would seem that the BIR complied with the requirements to consider its service of assessment as actually or constructively received by the taxpayer. However, in this case, other than proving that the BIR did indeed mail the said notices as evidenced by registry receipts, the BIR was unable to present additional proof that the taxpayer actually received the same. Moreover, based on the testimonies of the BIR’s witness, it was testified that the BIR merely assumed that the petitioner duly received the notice at the address stated in the BIR’s records and petitioner’s Tax Declaration from the Assessor’s Office.

The Court has constantly held in previous cases that a constructive service of assessment is merely a disputable presumption that can be directly denied by the taxpayer. In such a situation, the burden of proof that such notice of assessment was actually received by the taxpayer is shifted to the BIR. The reliance on presumption of receipt of the taxpayer is only satisfactory if undisputed. Hence, in instances where the BIR cannot prove that the service of the assessment was made to the taxpayer, the date when the taxpayer secures a copy of the assessment shall be considered the date of service of the assessment, which in this case, was when the taxpayer was informed by BIR of the garnishment made on his account. Therefore, the CY 2007 assessment had already prescribed by the time the taxpayer was able to secure a copy of the Final Assessment Notice (FAN).

The CTA apparently no longer discussed if no notice of change of address was made by the taxpayer as prescribed under Section 11 of RR No. 12-85, which reads as follows:

“SECTION 11. Change of address. -- In case of change of address, the taxpayer must give written notice thereof to the Revenue District Officer or the district having jurisdiction over his former legal residence and/or place of business, copy furnished the Revenue District Officer having jurisdiction over his new legal residence or place of business, the Revenue Computer Center and the Receivable Accounts Division, BIR, National Office, Quezon City, and in case of failure to do so, any communication referred to in these regulations previously sent to his former legal residence or business address as appearing in his tax return for the period involved shall be considered valid and binding for purposes of the period within which to reply.”

This raises the question as to the responsibility of a taxpayer who changes his/her address to notify the BIR.

In a similar case, CIR vs. BASF Coating + Inks Phils., Inc., G.R. No. 198677, the BIR sent a FAN via registered mail to the taxpayer’s old address. In this case, the taxpayer did not inform the BIR of its changed address. The taxpayer duly protested citing violation of due process and prescription. On the other hand, the BIR cited Section 11 of RR No. 12-85 and Sections 203 and 222 of the Tax Code of 1997, stating that such change of address without prior notice to the BIR would suspend the running of the three-year prescriptive period to assess. The Supreme Court (SC) ruled in favor of the taxpayer and held that no valid notices were sent since the BIR was well aware that the taxpayer has moved to its new address. Apparently, certain letters were sent by the BIR to the new address before the issuance of the Preliminary Assessment Notice (PAN) which was sent to the old address. The SC even held that the BIR should have been alerted of such change in address by the fact the PAN sent to the old address was “returned to sender”. Hence, the assessments of the BIR were declared void.

In both cases, the Courts emphasized the importance of the taxpayers’ actually receiving and being informed of the assessment issued against them. These cases may serve as guide to taxpayers as to their rights to due process during the examination. Both BIR and taxpayers must ensure that procedures are followed and rights observed. For an orderly society, the power to tax by the State must be balanced by the right to due process of the citizens.

Juvy H. De Jesus is a senior with the Tax Advisory and Compliance division of Punongbayan & Araullo.